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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Behavioural Finance in Practice

A client has an investment horizon of 15 years but checks his portfolio daily and shifts to debt after each short-term dip. Applying the concept of myopic loss aversion, which advice reduces the harm most effectively?

Evaluating performance over longer intervals matched to the 15-year horizon, such as annually, best reduces harm. Myopic loss aversion is driven by frequent checking that makes short-term losses feel larger, causing panic switching away from equity.

  1. AIncrease the frequency of reporting to build awareness
  2. BEvaluate performance over longer intervals aligned to the goal horizon, such as annuallyCorrect
  3. CMove entirely to equity immediately
  4. DEvaluate only the single worst-performing holding

Explanation

Myopic loss aversion arises when frequent evaluation makes short-term losses loom large. Lengthening the evaluation interval to match the horizon reduces the pain of fluctuations. More frequent reporting worsens it, and focusing on the worst holding magnifies loss sensitivity.

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